Many people are are misinformed about credit cards, their credit score and are even under the impressions that credit cards are bad. However, this is not true and credit cards can be a blessing if you understand the various factors that people get wrong about credit cards. Once you understand the biggest credit card myths, you will be able to boost your credit score and even save money.
There are some universal truths about credit cards. For instance, maxing out your credit card is bad, and failing to pay them on time is even worse.
However, there is also a lot of misinformation and myths surrounding credit cards that we’d like to clear up. By exposing these biggest credit card myths,
we will be empowering you to use your credit card appropriately, which will help you build a solid credit history.
Here they are:
a. Closing old credit cards helps your credit score
This is one of the most persistent credit card myths. Many borrowers are ill informed when it comes to the way their cards affect their credit score. The truth is that getting rid of your older credit card can actually dent your credit score.
When you close an older credit card and you don’t change your spending, you’ll be reducing the available amount of credit for your use. Hence you will
decrease your spending abilities and remove good history and the age of your accounts in good standing. Good history tells future creditors that you have
held a credit card for X amount of time and remain in good standing and will continue to do so. In fact, the length of your credit history influences 15%
of your credit score. Therefore if you remove your old cards, you are removing part of your history leaving future creditors wondering what type of person
you are in terms of spending and paying off your debt. Instead, we recommend you keep your old credit cards as this will increase the share of available
credit to you and increase your credit utilization ratio which affects 30% of your FICO score.
b. Carrying a balance actually hurts your score
One of the biggest credit card myths is that a high credit card balance lowers your score. You should know that the amount of money you owe doesn’t affect
your credit score. What actually affect your credit score is the amount of money you owe in relative to the amount of money available to you also known as
credit utilization ratio. The amount owed affects your FICO score by 30%. But this doesn’t refer to the dollar amount but rather, the percentage of your
available credit that you’re using. The best thing to do is to only charge a small amount on your current credit card and make sure you pay it off every
month or keep your balance under 30%.
c. The number of credit cards you own affects your credit score
One of the main reasons many credit card users close their old cards is that more than 90% of consumers think that the number of cards you have affects
your credit score. The truth is that when you apply for a new credit card, you’ll suffer a dip in your score, which is actually temporary, but owning more
cards is not actually worse than owning one. In fact, some people have and use dozens of cards and still maintain an excellent FICO score.
We would recommend that you have two so that if a particular retailer doesn’t accept one, or if one card gets lost, you can always use the other one.
However, you should space applying for new credit cards for about six months as each application causes a hard inquiry on your credit report, impacting
Credit card interest starts accruing immediately after a purchase
Many people believe that immediately after the transaction, credit card interest starts accruing, which is perhaps the reason some borrowers prefer debit
to credit cards. In truth, the interest starts accruing a day after your payment is due. So if you charge $1000 and pay it in full, you do not accrue any
interest. All you did was allow yourself some extra time to have the funds needed to pay for your purchase leaving you a zero dollar balance.
Don’t beat yourself up if you believed some of these credit card myths. A large number of people do. Instead use your new knowledge to use your credit
cards to your advantage.
Did you believe any of these credit card myths? Are we missing a myth that you now know to be false? Comment below.